Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, April 17, 2017. You can also find the re-balance calendar for 2017 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Quarter End Asset Trend Review

The first quarter of this year ended with some volatility. In this newsletter, we review the major asset trends and discuss several possible scenarios. 

Asset Trends

Let’s look at the performance in the 13 weeks (about a quarter) and the asset trend scores: 

Major Asset Classes Trend

03/31/2017

Description Symbol 13 Weeks 52 Weeks Trend Score
Emerging Market Stks VWO 11.21% 17.49% 7.18%
Gold GLD 8.31% 1.53% 1.05%
International Developed Stks VEA 7.96% 14.22% 6.19%
US Stocks VTI 5.68% 17.35% 6.68%
International REITs RWX 4.21% -0.86% 0.14%
Emerging Mkt Bonds PCY 4.18% 7.6% 1.9%
International Treasury Bonds BWX 2.54% -4.46% -1.57%
US High Yield Bonds JNK 2.28% 14.38% 4.18%
US Credit Bonds CIU 1.14% 1.45% 0.44%
Municipal Bonds MUB 1.11% -0.4% -0.13%
Intermediate Treasuries IEF 1.03% -2.6% -1.06%
US Equity REITs VNQ 0.8% 3.13% 0.31%
Total US Bonds BND 0.76% 0.18% -0.18%
Commodities DBC -3.98% 16.46% 2.64%

For the last 3 months, the best performing major assets are all stock assets: emerging market stocks, US stocks and developed market stocks. US equity REIT was affected by the rising rate sentiment. Commodities had the worst return:

For the last 3 months, commodities had a meaningful negative return. This asset had the best performance in 2016 but it faltered in the last quarter: 

Among fixed income sectors, foreign bonds have done the best: 

Fixed Income Assets Trend

03/31/2017

Description Symbol 13 Weeks 52 Weeks Trend Score
International Inflation Protected WIP 5.36% 2.49% 1.35%
Emerging Mkt Bonds PCY 4.18% 7.6% 1.9%
International Treasury BWX 2.54% -4.46% -1.57%
High Yield JNK 2.28% 14.38% 4.18%
20+ Year Treasury TLT 1.75% -5.57% -2.79%
Inflation Protected TIP 1.31% 1.38% 0.44%
Long Term Credit LQD 1.17% 2.17% 0.23%
Intermediate Term Credit CIU 1.14% 1.45% 0.44%
National Muni MUB 1.11% -0.4% -0.13%
Intermediate Treasury IEF 1.03% -2.6% -1.06%
US Total Bond BND 0.76% 0.18% -0.18%
MBS Bond MBB 0.58% -0.11% -0.08%

Emerging market bonds and foreign bonds had the best returns in last quarter while high yield bonds and long term bonds had some correction but still managed to remain positive in the quarter. 

The main themes of last quarter are

  • Investors were excited about the perspective of economy growth by the new administration’s policies but at the end of the quarter, such hope faded a bit due to the reality of policy implementation. 
  • US dollar benefited from the hope initially but largely corrected at the end of the quarter, propelling foreign bonds, which are sensitive to currency exchange and trade policies, to rise. 
  • Rate sensitive sectors such as REITs and utilities managed to eke out positive returns but remained sluggish. 
  • Stocks remained to be the best performing assets, indicating investors still have hope to be in a reasonable economy growth environment with accommodative interest rates. In another word, it’s hoping to be in a goldilocks situation. 

Asset class scenarios

US stocks are still in a record territory. Looking back, we see that US stocks first benefited from ultra loose Federal Reserve monetary policies (low interest rate and Quantitative Easing), relatively stable yet anemic economic recovery, strong employment growth and then, even though being at a very high valuation, a Trump’s presidency induced economic growth expectation. The bull market since 2009 has lasted longer than most in history. Though we have no crystal ball or a strong opinion on where the US stocks will go near term, we still can perform some scenario analysis and see how they will perform relative to other assets, especially international stocks.  

The first scenario is that the new president’s economic and trade policies will help to boost US economy growth which in turn continues to drive up risk asset (stocks) prices. In this case, we believe it’s highly unlikely that US will manage to do so (at least in the short term) with other economies (Europe and emerging markets) suffering. Our belief lies from that the world’s economy is now highly interwoven and it’s impossible to undo globalization without hurting the US short term (though some might argue that it’s beneficial to the US In the long term) . It follows that in this scenario, stocks in emerging market and developed markets will probably do well too. Moreover, considering the relatively cheap valuation of emerging market stocks, these stocks might even outperform the US.

It’s also possible that even in a relatively stable (i.e.  less radical) policy environment, US economy will encounter a correction. This can be caused by higher interest rate, inventory correction etc. in a ‘normal’ economic cycle. In this case, US stocks will undergo correction which will bring down stocks in other regions. However, it’s possible that emerging market stocks might not correct as much as the US because of their cheaper valuation. In fact, there exists even a possibility (depending how severe the correction will be) for emerging market stocks to continue to rise as investors rotate out of US stocks in this situation (this probably will only happen when the US undergoes a shallow correction).

The third scenario is that US and world economy will experience some difficulty because of the policy friction and/or shocks caused by financial or geopolitical events. In this case, all risk assets will correct. We have no idea how much each asset will fall but do believe in this dire situation, all risk assets will fall dramatically. 

From the above analysis, one can see that emerging market stocks might hold some slight edge in the near term. However, the main purpose of the above analysis is not to justify this thesis. Instead, what we really want to point out is that working on (in the  Strategic Asset Allocation (SAA)  case, investing in) a diversified set of major assets is beneficial and it can provide opportunities for a dynamic strategy such as our  Tactical Asset Allocation(TAA).  

Similarly, in fixed income, even though we are in a rising rate environment, working on various sectors of bonds is beneficial. If higher interest rate does derail economy growth, long term bonds will be favored again. Long term bonds will also continue to do well if investors sense that the long term inflation is actually very low (usually that would mean economy will grow in a very slow pace). If, however, economy still chugs along in a rising rate environment, high yield bonds and inflation protected bonds (TIPS) can still offer gains. We can not predict how markets will go but a diversified or dynamic bond sector rotation or just the dynamic rotation among various total return bond funds with long term record (see January 23, 2017: Fixed Income Portfolio Review) will help us to navigate through the period. 

Market Overview

US dollar rose last week and US stocks continued its recovery from the shallow correction. For now, we see the up trends for risk assets are still intact. Investors also favor small cap stocks more than large cap. Sector wise, technology, financial and industries continued their outperformance. We remain cautiously optimistic because of the elevated valuation and the uncertainty in the new economy and trade polices to be enacted. 

For more detailed asset trend scores, please refer to 360° Market Overview

Now that the Trump administration is officially sworn in, the new president is facing the reality to deliver his many promises to make substantial changes. As the nation is posed to invest, the most important factor to watch is how productive the investments will be. Simply put, productive investments will result in better return on investment (ROI), tangibly or intangibly. They should also increase productivity that in turns will improve our standard of living. Capital misallocation can result in a higher growth but might not improve the real standard of living, which is the ultimate goal of economic activities. Whether the new president can truly achieve this goal is still yet to be seen. One thing is certain: we will see more market volatilities. 

In terms of investments, U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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